U.S. retailers venture overseas for growth

As Americans shop less, retailers move into foreign markets

July 06, 2010|By Sandra M. Jones, Tribune reporter

As Americans' love affair with shopping cools, U.S. retailers are venturing overseas in search of growth.

Bloomingdale's and Crate & Barrel each opened their first store outside the U.S. in Dubai this year. Abercrombie & Fitch just opened its first store in London. Sears has begun shipping tools and clothing to 90 countries. Macy's is looking at going into China. And Target, the discount chain that for a decade has resisted Wall Street pressure to expand internationally, revealed this spring that it wants to open stores outside the U.S. and is looking at Canada, Mexico and Latin America.

Even Wal-Mart Stores Inc. — the retail behemoth that has been operating internationally since 1991 — made clear at its annual meeting in June that it is counting on consumers outside the U.S. to make up for stalled sales at home.

"In the 1990s and early 2000s, the U.S. was growing at a healthy clip compared to the rest of the world," said Frank Badillo, senior economist at Kantar Retail, a retail research group. "There are now growing doubts as to how fast the U.S. can grow going forward, and that's given lots of retailers reason to look elsewhere."

Unlike Nike sneakers or McDonald's hamburgers, selling general merchandise historically has been a parochial business. With few exceptions, most of the nation's retail chains have stayed close to home, basing their expansion plans on the vastness of the American landscape and the U.S. consumer's seemingly insatiable appetite.

Now, in the wake of the recession, that longstanding formula has lost its allure.

Since the recession began in December 2007, two out of three Americans say they have cut back on spending, according to a new survey by the Pew Research Center's Social and Demographic Project. Even accounting for the thousands of stores that closed during the economic downturn, Americans remain overwhelmed with opportunities to shop.

Still, setting up shop overseas is no sure thing. Understanding local tastes, adjusting to local culture and analyzing the attractiveness of real estate in local shopping malls and neighborhoods are challenges that have stumped some of the most sophisticated retailers.

Wal-Mart pulled out of Germany in 2006 after eight years and $1 billion in losses, unable to compete with local discounters Aldi Group and Lidl. The Bentonville, Ark.-based discount chain ran into similar trouble in South Korea, where it also threw in the towel.

The Gap, Toys R Us and Starbucks — retailers with extensive international businesses — also fumbled their initial overseas efforts before eventually figuring out how to adapt to local tastes and customs.

"The strength of the U.S. retailers has been scale and replication, not how do I flex to the market," said Neil Stern, a partner at McMillan Doolittle, a Chicago-based retail consulting firm.

Retailers have known all too well the risks of expanding overseas and have avoided doing so. As long as Americans were shopping with a vengeance, it was easier to build more stores at home. Now, the tables have turned, and the risk of losing ground by avoiding foreign countries is too real to ignore, Stern said.

Costco Wholesale Corp., for example, has quietly become a bigger international company than most investors recognize, said Credit-Suisse analyst Michael Exstein in a June 28 report. About 20 percent of sales and 28 percent of operating profit came from international activity in 2009 and "is set to grow at an accelerating rate," Exstein said.

Likewise, Urban Outfitters Inc. is moving aggressively into Europe and Asia. The chain of trendy clothing stores, which include Anthropologie and Free People, relies heavily on third parties to operate its stores, hiring local experts to handle the nuts and bolts of the operations for everything from logistics to systems, Urban Outfitters CEO Glen Senk said in an earnings conference call earlier this year.

While relying on local experts is "typically more expensive" than handling overseas operations themselves, the company believes that strategy is worth the investment, Senk said. Once the foundation is established, Urban Outfitters can "methodically" bring the overseas operations in-house, he said.

Although Urban Outfitters started doing business in Europe in 1998, its presence there is small, accounting for about 5 percent of sales.

The European apparel market is about 10 percent larger than the U.S. apparel market, according to Urban Outfitters' calculations, with more than two-thirds of that volume in five countries: England, Spain, France, Italy and Germany. The market size leads Senk to believe that he could operate at least 100 Urban Outfitters and 100 Anthropologie stores in Europe.

"Any public retailer's board and management has to think about what they're doing internationally," said Madison Riley, managing director for North America at Kurt Salmon Associates, an Atlanta-based consulting firm. "You have to be making plans. If you don't start now, you'll be in real trouble in the next five to 10 years."